Directors loans

[Wanderer]

So I've done a search which brought up a lot of people asking this question only for other people to say "do a search". I'm hoping we can get a definitive answer to the question here.

Doing a Google, you find a lot of people saying "Don't take more than £5,000 or you end up in deep trouble with complicated tax affairs and it's not worth it".

So can someone look at this scenario and see if I'm making sense or not.

Let's imagine that I am a director of a company which has a large amount of money in the bank and I take a director's loan of £25,000 for a year and put it in my flexible mortgage account to pay off some of the balance. Now this loan is technically illegal under the companies act but it's a close company so no one is going to complain about it. Since the loan is over the £5,000 limit for directors loans so there are two options:

1. The company gives this to me as an interest free loan and it's treated as a benefit in kind which attracts PAYE/NI .
2. I pay the company interest at the HMRC approved interest rate, let's say it's currently 4% so over the 12 months, so the company would charge interest on the £25,000 loan at 4% would be £1,000.

Under option 1, the interest free loan would mean that I have to pay PAYE and NI on the BIK of £1,000. I think there is also employer's NI too? So we are looking at a hefty tax charge, let's say it costs ~£500 in tax.

Under option 2, I pay the company £1,000 in interest which would be accounted for as company profit. I then pay the CT on the profit then pay it back to myself as a dividend. Let's say that I net ~75% of the company's profit so I get £750 paid back to me at dividend time so the net cost of the 12 month loan to me is £250 which is an interest rate of ~1%.

Reading on Businesslink:

If you pay off your director's loan in full by the last day of your company's Corporation Tax accounting period:

* your company does not pay Corporation Tax on the loan
* you don't need to tell HMRC about the loan on your Company Tax Return

My reading of that is that if you pay the loan off at the right time, then HMRC never need to know that you even took the loan out. If you are a day late then your company must pay tax at 25% of the value of the loan and you need to declare the loan which is something that we'd probably like to avoid.

It would seem that you can't do this systematically, paying off the loan 9 months out and then taking it out again because HMRC call this bed and breakfasting.

Does all that make sense? I wanted to get my story straight before I spoke to the accountants about it...

[ASB]

Alternatively, if the mortgage has linked accounts then deposit the money in one of the linked accounts (or preferably a newly created linked account). Ensure you create a correct deed of trust which demonstrates you are simply holding the companys cash on its behalf. Bingo, no BIK.

If you search you should be able to find THEPUMA view on this, I think he has previously offered to give people a sample trust deed.

Your accountant may not like it, but that doesn't make it wrong.

[Clare@InTouch]

My reading of that is that if you pay the loan off at the right time, then HMRC never need to know that you even took the loan out.

Just to answer this point - if a loan exists at the year end then it has to go on the CT return regardless of whether it's been repaid, and it should also be noted in the accounts.

The fact that it was repaid will also be noted on the CT return however, and no tax will arise if it's paid in full.

[rmmc]

Let's imagine that I am a director of a company which has a large amount of money in the bank and I take a director's loan of £25,000 for a year and put it in my flexible mortgage account to pay off some of the balance. Now this loan is technically illegal under the companies act but it's a close company so no one is going to complain about it.

It is not illegal any more. Used to be under companies act 1985.

Since the loan is over the £5,000 limit for directors loans so there are two options:

1. The company gives this to me as an interest free loan and it's treated as a benefit in kind which attracts PAYE/NI .
2. I pay the company interest at the HMRC approved interest rate, let's say it's currently 4% so over the 12 months, so the company would charge interest on the £25,000 loan at 4% would be £1,000.

Under option 1, the interest free loan would mean that I have to pay PAYE and NI on the BIK of £1,000. I think there is also employer's NI too? So we are looking at a hefty tax charge, let's say it costs ~£500 in tax.

Slight correction, there is no NI liability on employees. Employer pays Class1A on benefit value i.e. equal to £1000 (from your example).

Under option 2, I pay the company £1,000 in interest which would be accounted for as company profit. I then pay the CT on the profit then pay it back to myself as a dividend. Let's say that I net ~75% of the company's profit so I get £750 paid back to me at dividend time so the net cost of the 12 month loan to me is £250 which is an interest rate of ~1%.

Do not forget that company pays the CT on interest received than you pay further tax depending on your personal level of income. If it is within basic rate band then no further tax to pay on dividend.

Reading on Businesslink:



My reading of that is that if you pay the loan off at the right time, then HMRC never need to know that you even took the loan out. If you are a day late then your company must pay tax at 25% of the value of the loan and you need to declare the loan which is something that we'd probably like to avoid.

It would seem that you can't do this systematically, paying off the loan 9 months out and then taking it out again because HMRC call this bed and breakfasting.

Does all that make sense? I wanted to get my story straight before I spoke to the accountants about it...

Few points

Basic rules are, if you have a loan outstanding at year end you need to fill the supplementary pages CT600A "Loan to participators by close companies".

You pay the tax on lower amount of
-at year end
-normal due date i.e. 9 months and 1 day following the end of chargeable accounting period

Any transaction with the directors or share holders (connection person) needs to be disclose in the account, even the dividend paid.

HTH